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Oil: OPEC impact on black gold

Everything Has Its Price. Oil and OPEC

The OPEC schemes, the US shale settlement, and the Сhina’s economic health — all of these factors can make oil prices fluctuate. The turbulence observed in the global key commodity market shows no signs of being over. OPEC approved the largest monthly reduction of production since the onset of the pandemic in 2020 by 2 million b/d, i.e. about 2% of the world’s supply.

The decision was implemented a few hours after the EU countries agreed to the U.S. plan to cap Russian oil prices.

In essence,

1. OPEC has actually supplied much less oil than promised over the past couple of months. The majority of producers extract less than what their quotas allow, half of them being «empty barrels». The supply will now drop much less than expected, moving closer to 1 million bpd. This is why OPEC’s monthly targets are basically useless information.

2. Europe is taking steps to end its reliance on Russian energy. Meanwhile, Saudi Arabia and the Gulf states view this as a dangerous precedent with potentially massive political consequences that can result in a widespread price drop. Moreover, it may even be used against the alliance in the future regardless of whether price caps are effective.

Essentially, OPEC’s mission is to keep supply under control. Historically, this organization has strived to maximize revenues and have an impact on foreign policy. Another critical objective is to stimulate long-term investments in oil production.

3. Strong lobbying by the U.S. administration fell through. Biden’s administration will now work with Congress on legislation to reduce OPEC’s control over energy prices (a reference to the NOPEC’s anti-cartel bill that was long considered but has never been passed). Meanwhile, the United States Department of Energy will compensate for the decline in quotas using the Strategic Petroleum Reserve and will deliver 10 million barrels to the market. Earlier this week, the administration claimed that it didn’t intend to extend its six-month efforts to extract 1mb/d that were expected to be over later this month.

4. In the meantime, the U.S. strategic oil reserves are running out of heavier oil needed by oil refining factories and should run out by March. At the same time, major oil companies were already forced to reduce capital expenditures because of the new ESG guidelines. Aside from that, pipelines are not being built while oil refining factories are becoming dated or shut down. Until the United States extracts enough for itself (it consumes ~19 million barrels per day), the country will remain at the mercy of the SA and OPEC.

5. Any price is nothing but supply and demand. Bloomberg wrote that the end of the lockdowns in China could potentially result in a dramatic reduction in global oil inventories and a spike in global prices in the future. Interestingly, this is a serious wake-up call for the United States and the EU given a sharp drop in consumption and on the brink of a recession. In other words, it is evident that the increase in extraction and replenishment of reserves at half price is an unfavorable position for OPEC.

6. Given additional factors such as a reduction in gas supplies through the Nord Stream pipeline, it will have to be replaced by either coal burning or oil which may ease the pressure:
✔the US eases policy and promotes an increased domestic oil production;
✔stopped (frozen) sanctions against Iranian or Russian oil;
✔the global demand for oil drops by an equal amount;
✔European oil-producing countries soften their policies and boost production;
✔dependent countries are opting for renewable energy sources.
The odds that all these scenarios will happen soon if at all, are extremely low. Therefore, oil prices will go up until either supply grows or demand drops.

7. And last but not least, it should come as no surprise that OPEC is laughing openly in Biden’s face. It is not easy to force the cartel to produce more when its administration is the one that made this process harder for domestic suppliers. That will become one of the reasons that will push the Democrats out of office in 2024.

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